The Evolution of Corporate Governance in Brazil

Bernard S. Black Northwestern University, School of Law and Kellogg School of Management Antonio Gledson de Carvalho Fundacao Getulio Vargas School of Business at Sao Paulo Joelson Oliveira Sampaio Fundacao Getulio Vargas School of Business at Sao Paulo

(draft November 2012)

Northwestern University School of Law Law and Economics Research Paper No. 12-22 This paper can be downloaded without charge from the Social Science Research Network electronic library at: http://ssrn.com/abstract=2181039

Electronic copy available at: http://ssrn.com/abstract=2181039

The Evolution of Corporate Governance in Brazil

Bernard S. Black
Northwestern University School of Law and Kellogg School of Management

Antonio Gledson de Carvalho**

Fundacao Getulio Vargas School of Business at Sao Paulo

Joelson Oliveira Sampaio***

Fundacao Getulio Vargas School of Business at Sao Paulo

2012 Bernard S. Black. All rights reserved.

Abstract. We use three extensive hand collected surveys reporting governance practices in 2004, 2006, and 2009 to analyze the evolution of corporate governance in Brazil. We aggregate our governance information into six indices covering the main aspects of corporate governance: board structure, ownership, board procedures, related party transactions, shareholders rights and disclosure, and a broad index computed as their average. Our analysis shows that corporate governance practices improved significantly in the 2004-2009 period. This evolution is due to two main factors: 1) growth in Novo Mercado and Level II listings, mainly through the entry of new firms with high corporate governance practices (IPOs) and 2) improvement in the governance practices of the firms that were already listed. Governance practices for firms already listed on Novo Mercado and Level II were stable during that period. There were broad improvements for already listed firms, including board structure, board procedures, shareholder rights and disclosure. We also find that many firms in Novo Mercado/Level II exceed the minimum listing requirements. Finally, firms with venture capital sponsors adopt present better board procedures than other firms. Keywords: Brazil, corporate governance, boards of directors, minority shareholders

JEL codes: G18, G30, G34, G39, K22, K29

Northwestern University School of Law, 775 E. Chicago Ave, Chicago, bblack@northwestern.edu. Tel: (512) 503-2784.
**

Il 60611.E-mail:

FGV-EAESP, Av Nove de Julho, 2029 Sala 912, So Paulo, SP, Brasil 01313-902. Email: gledson.carvalho@fgv.br. Tel: (5511) 3281-7767.
***

FGV-EAESP, Av Nove de Julho, 2029 Sala 912, So Paulo, SP, Brasil 01313-902. Email: joelson.sampaio@fgv.br. Tel: (5511) 3281-3547.

Electronic copy available at: http://ssrn.com/abstract=2181039

1 -- Introduction
In the past decades the Brazilian economy has undergone major changes such as macroeconomic stability, achievement of investment grade status for the debt of the government and many individual firms; strong economic growth, including major Brazilian firms becoming world-class competitors; revival of the stock market (including the rise of Novo Mercado); and development of pension funds, which became major investors in public company shares. Table 1 provides an overview of some of the major changes: Inflation, which during the 1980s and part of the 1990s was often two-digit monthly, has dropped to around 5% per year; economic growth, which was slow during the 1980s and 1990s, has been strong; and real interest rates, which had remained high as inflation declined, have dropped into the mid-single-digits. Significant changes were also observed in the stock market. Through the early 2000s, Brazil was seen as having relatively weak corporate governance. In a ranking of 49 countries based on 1997 corporate standards, Nenova (2003) placed Brazil 24th for investor rights, 43rd for enforcement of corporate law, and 40th for accounting standards. Moreover, Brazilian law allows for both voting and non-voting shares, and many Brazilian corporations are controlled by majority shareholders who own a majority of the corporations voting shares, but a smaller economic interest.1 Examples of expropriation of minority shareholders by controlling shareholders were common. Dyck and Zingales (2004) estimated the benefits of corporate control in 39 countries, based on the difference between trading prices and prices paid for control blocks. They found that Brazil had the greatest average control benefits, estimated at 65% of equity value. In 2000, in response to concern about weak protection for minority shareholders (including extensive use of non-voting shares, few outside directors, and low levels of disclosure), the So Paulo Stock Exchange (BM&FBovespa) created three high-governance markets (Novo Mercado, Level I and Level II). This contributed to a surge in initial public offerings, which had been nearly nonexistent until 2004; a leveling off in the number of listed companies, which had been shrinking; and sharply rising trading volume and liquidity (De Carvalho and Pennacchi, 2012). Most new listings were at one of the premium listing levels; some older companies also migrated their listings to a higher level. The proportion of companies listed on one of these premium markets has soared (see Table 2 below for details).2

As of 2000, 89% of Bovespa-listed corporations had issued non-voting shares, representing 54% of all shares listed on Bovespa and the vast majority of trading volume (Nenova (2005)). In 2008, Bovespa created a fifth Bovespa Mais market, which is similar to Novo Mercado but removes some requirements, principally the need for 25% free float. As of 2009, there was only one firm at this listing level, and none in our sample. Totals for all listed firms exclude this firm.
2

2
Electronic copy available at: http://ssrn.com/abstract=2181039

In spite of these major changes in the economy and the stock market, little is known about how corporate governance standards have been changing. This article aims at filling this gap by providing a picture of the evolution of corporate governance practices in Brazil. Our data comes from three extensive hand collected surveys conducted in 2005, 2007 and 2009 on their governance practices, roughly 2004, 2006, and 2009. Thus, the first survey comes at the beginning of the surge in IPOs in 2004; the third comes during the financial-crisis-related lull in new listings during 20082009. We supplement the surveys with financial and company information from CVM and

Economatica. One problem in describing corporate governance is that it is multifaceted one can drown in details. To address this issue, we aggregate our governance information into six indices

covering the main aspects of corporate governance: board structure, ownership, board procedures, related party transactions, shareholders rights and disclosure. The board structure index is

subdivided into two subindices: one for board independence, the other for audit committee and fiscal board. Finally, we compute a broad index, Brazilian Corporate Governance Index (BCGI), as the average of these 6 indices. We focus on private Brazilian firms, and exclude governmentcontrolled and foreign-controlled firms. Our analysis shows that corporate governance practices improved significantly in the 20042009 period. This evolution is due to two main factors: 1) growth in Novo Mercado and Level II listings, mainly through the entry of new firms with high corporate governance practices (IPOs) and 2) improvement in the governance practices of the firms that were already listed, sometimes including change in listing level. Governance practices for firms already listed on Novo Mercado and Level II were stable during that period. There were broad improvements for already listed firms, including board independence, board procedures, shareholder rights and disclosure. We also find that many firms in Novo Mercado exceed the minimum Novo Mercado requirements. Finally, firms with venture capital sponsors adopt present better board procedures than other firms. This article is organized as follows: Section 2 describes our sample and data. Section 3 describes our corporate governance indices. Section 4 presents our results. Section 5 concludes. Some limitations of our research. First, any measure of corporate governance, including ours, is a construct: We begin with opinions, informed by judgment but not by data, about what should be considered to be good corporate governance. We assess in separate work the extent to whether our constructs predict higher share prices or changes in corporate behavior or performance (Black, de Carvalho and Gorga, 2012). Second, the firms that responded to our surveys represent a large fraction of the market capitalization of all private firms on Bovespa, but may be less representative of smaller firms.

Table 1. Brazilian Macroeconomic Evolution

All values are at the end of each year, except as indicated. Data on inflation and foreign investment were collected at the site of the IPEA. Data on pension funds were collected from the Brazilian Association of Private Pension (ABRAPP). Data on IPOs and volume were collected at the Stock Exchange of So Paulo (BM&FBovespa).
1999 GDP growth (%) Treasury Interest rate (% aa) Inflation (% aa) Pension Fund Assets (US$ bi) IPOS Committed Capital in Private Equity (US$ Bi) Number of firms listed at Bovespa Number of firms on Novo Mercado and Level II Bovespa Traded Volume (US$ bi/year) Market capitalization (US$ bi) 0.2 19.0 8.9 69 1 3.7 534 86 212 2000 4.3 15.7 6.0 79 1 4.9 494 0 95 199 2001 1.3 19.0 7.7 72 0 5.0 468 0 65 169 2002 2.6 25.0 12.5 65 1 4.7 436 5 39 111 2003 1.1 16.5 9.3 78 0 4.8 410 5 71 220 2004 5.7 17.7 7.6 96 7 5.6 390 14 114 317 2005 3.1 18.0 5.6 137 9 7.2 381 28 172 460 2006 3.9 13.2 3.1 175 26 13.5 394 58 281 703 2007 6.0 11.2 4.5 258 62 22.7 433 100 677 1,284 2008 5.2 13.7 5.9 191 5 28.1 426 119 590 589 2009 -0.3 8.7 4.3 296 6 36.1 422 122 747 2010 7.5 10.7 5.9 324 11 39.2 427 133 704

1,324 1,522

Source: De Carvalho et al. (2006) and ABDI (2011).

2 Methodology, Sample and Data Our results are based on three extensive surveys conducted along 2005, 2007 and 2009. They report practices of 2004, 2006 and 2008-2009. These surveys were sent to all companies listed on Bovespa, with supporting letters from Bovespa, IBGC, and Fundacao Getulio Vargas. We also carried out extensive followup with each company to increase the response rate and obtain answers to questions initially left unanswered, or for which the answers were unclear.3 We also used several additional data sources. The list of publicly traded companies, their market capitalization, and listing level comes from Bovespa, at www.bovespa.com.br/principal.asp. We obtain financial data from the Brazilian financial database Economatica, at www.economatica.com, and CVM, at www.cvm.gov.br. We updated this data as needed. Our sample consists of 116 respondent firms in 2004, 172 in 2006, and 177 in 2009. These numbers include firms controlled by the state, foreign parent company, and Brazilian private sector groups and individuals (Brazilian private firms or BPF). It is likely that governance characteristics differ between these three groups; we focus here on BPF. There were 83 BPFs in our 2004 sample,
3

The surveys are available from the authors on request, in both Portuguese and English translation.

141 in 2006, and 136 in 2009. The 83 BPFs in the 2004 sample corresponded to 27% of all BPFs listed in that year (83/313) and 62% of their market capitalization. The 2006 sample represent 48% of all BPF listed in that year (141/290) and 58% of their market capitalization. Finally, the 2009 represent 44% of BPFs (136/306) and 59% of their capitalization. Thus, our sample is reasonably representative of the overall Brazilian stock market, with a tilt toward larger firms. Black, De Carvalho and Gorga (2010) describe extensively the 2005 survey. The 2007 and 2009 surveys have not previously been studied. The principal purpose of this paper is to examine changes in corporate governance patterns over the available time period. Observed changes in corporate governance can be due to changes within firms or change in the sample. To disentangle these two components, we sometimes focus on firms that responded to more than one survey. There were 36 overlap firms that were in the 2004 and 2006 samples, 29 that were in both 2004 and 2009, 81 firms that were in both 2006 and 2009, and 22 firms that responded the three surveys. Bovespa provides four listing levels: Regular, Level I, Level II, and Novo Mercado. Novo Mercado has the highest standards and companies must have: only common shares (no non-voting preferred shares); a minimum of 25% free float (shares not controlled by the majority shareholders); a board of directors having non-staggered terms of two years or less; financial statements prepared following U.S. GAAP or IFRS; takeout rights for minority shareholders in a transfer of the controlling stake; in a freezeout or delisting, a tender offer must be made for minority shares at their economic values; trades by controlling shareholders and senior managers must be disclosed; and disputes with minority shareholders are settled by the Brazilian arbitration panel Cmara de Arbitragem do Mercado (CAM).4 Novo Mercados standards may be too strict for many Brazilian firms, including the many firms with non-voting shares.5 Level II

accommodates this by maintaining most of the Novo Mercado requirements, but allowing nonvoting shares. The Level I listing standards focus primarily on improved disclosure standards, including provision of consolidated financial information on a quarterly frequency. The regular level does not impose corporate governance requirements beyond those required by law. Below we often discuss Level II and Novo Mercado together. Panel B of Table 2 provides summary data on the market level where the firms in each survey were listed, at year-ends 2004, 2006, and 2009. At the end of 2004, Novo Mercado (Level II) were still small, with total listings of 18 (10) firms, respectively. Combined, these levels grew to 82 (18) firms in 2006 and 103 (19) in 2009. Their combined representation in our sample also
4 5

Arbitration Law 9307/96 requires that CAM reach a decision within 180 days.

Brazilian corporate law permits companies to issue up to 50% non-voting shares. The limit was two-thirds prior to 2001; many companies still have more than 50% non-voting shares.

increased from 8% (7/83) to 50% (68/136) in 2006 and 49% (70/141) in 2009. As Panel B shows, firms with a regular listing are under-represented in our sample; while Level 1 and Novo Mercado firms are over-represented in our sample in 2006 and 2009. For example, in 2009, Novo Mercado firms were 31% of all BPFs, but 43% of our sample, while Regular listing firms were 525 of all BPF firms, but only 30% of our sample. The growth in Novo Mercado/Level II firms was due principally to new listings through IPOs; there has also been some migration of firms from the regular market to higher levels. The number of firms in the regular market has been declining, from 316 in 2004 to 263 in 2009; the number of Level 1 firms has been roughly constant. Almost all IPOs have been on Novo Mercado or Level II.6

Table 2. Sample Description Panel A: Characteristics

Total number of firms and market capitalization for all public firms (private) which responded to the 2004, 2006 and 2009 Brazil CG Surveys. Exchange rate as of December 31, 2009 is R$1.75 per US$1. Market capitalization and number of Brazilian private firms is measured at end of survey year (for overlap rows, at end of most recent survey year).
Number of firms 2004 2006 2009 2004 & 2006 2004 & 2009 2006 & 2009 all 3 surveys All listed Brazilian private firms 313 290 306 325 306 306 306 Responding firms 83 (27%) 141 (48%) 136 (44%) 36 (11%) 29 (9%) 81 (26%) 22 (7%) Market cap (R$ billions) 1,027 2,157 2,192 2,157 2,192 2,192 2,192 Capitalization of responding firms 638 (62%) 1254 (58%) 1291 (59%) 734 (34%) 528 (24%) 708 (32%) 460 (21%)

The National Association of Investment Banking and Fixed Income (ANBIMA) allows its members to only participate in IPOs of companies that are listed at least Level I of corporate governance, except in those IPOs of companies that have shares listed abroad. The ANBIMA regulation is available at www.anbima.com.br.

Panel B: By Listing Levels

Number of firms listed on the indicated Bovespa levels for (i) all listed firms, (ii) Brazilian private firms, and (iii) firms which responded to the 2004, 2006 or 2009 our surveys. Overlapping firms is the number of firms in the sample listed on the indicated Bovespa levels for firms that responded two or more surveys (for overlap rows, at first survey year).
Number of firms All listed firms BPF Sample All listed firms BPF Sample All listed firms BPF Sample Regular 316 (83%) 260 (83%) 56 (67%) 293 (68%) 159 (55%) 51 (35%) 263 (62%) 160 (52%) 43 (32%) Level I 2004 37 (10%) 30 (9%) 20 (24%) 2006 40 (9%) 36 (12%) 22 (16%) 2009 37 (9%) 32 (10%) 23 (17%) 19 (5%) 18 (6%) 9 (6%) 103 (24%) 96 (31%) 61 (45%) 18 (4%) 17 (6%) 12 (9%) 82 (19%) 78 (27%) 56 (40%) 10 (2%) 8 (3%) 2 (3%) 18 (5%) 15 (5%) 5 (6%) Level II Novo Mercado

Overlapping Firms
2004 & 2006 2004 & 2009 2006 & 2009 all 3 surveys 19 (53%) 22 (27%) 16 (55%) 12 (55%) 12 (33%) 14 (17%) 7 (24%) 5 (23%) 1 (3%) 6 (7%) 1 (3%) 1 (5%) 4 (11%) 39 (48%) 5 (17%) 4 (18%)

3 Corporate Governance Indices Our Brazil Corporate Governance Index (BCGI) is calculated as the raw average of six indices covering the main aspects of corporate governance: board structure, ownership, board procedures, related party transactions, shareholders rights and disclosure. Overall they include 41 firm attributes that are often believed to correspond to good governance, on which we have reasonably complete data, reasonable variation across firms, and sufficient difference from another index element to justify inclusion. Most elements are dichotomous (coded as "1" if a firm has the attribute and "0" otherwise). Black, De Carvalho and Gorga (2012) report that higher BCGI scores in 2004 predict higher Tobins q. This provides providing evidence that BCGI as a whole is measuring something meaningful about firm governance. Table 3 describes the indices and their components. Our indices are: Board Structure (7 elements): Board independence is often considered to be a core element of corporate governance (e.g., OECD, 2004; Dahya, Dimitrov and McConnell, 2008). The existence of an audit committee, staffed principally or entirely by independent directors, can help to ensure the integrity of financial reporting (e.g., Klein, 2002). In Brazil, the fiscal board plays a role in

oversight of financial reporting similar to an audit committee, so our governance index considers this institution as well. We divide Board Structure index into two indices: Board Independence (4 elements, focusing on director independence and separation of the posts of CEO and board chairman) and Audit Committee and Fiscal Board (3 elements, focusing on the existence of the audit committee and fiscal board, and whether these organs include a minority shareholder representative). Ownership Structure (5 elements): A wedge between cash flow rights and voting rights can provide incentives for self-dealing, and predicts lower firm value (Claessens, Djankov, Fan, and Lang, 2002). Several mechanisms can be used to create such a wedge. Many Brazilian firms do so by using dual-class structures, with insiders retaining voting common shares and outsiders holding primarily preferred shares, thus creating a wedge between the voting and economic rights of the controllers. Measures of this wedge are often included in an overall corporate governance index (e.g., Black, Jang, and Kim, 2006). The ownership structure index includes elements which measure the proportion of nonvoting shares in a firms capital structure; the fractional ownership of voting shares by the largest shareholder; the wedge between this persons voting and economic rights; whether the control group is small (and hence more likely to be cohesive); and whether there are large outside blockholders who can monitor the controller. Board Procedure (6 elements): Assessments of board procedures are a common component of broad corporate governance indices. Our index assesses whether a board meets at least 4 times per year, whether it regularly evaluates the CEO and other executives, whether board members receive materials in advance of board meetings, and whether the firm has a bylaw governing the board and a code of ethics. Minority Shareholder Rights (7 elements): There is evidence that takeout rights are an important protection for minority shareholders in Brazil.7 We extract from the survey elements involving takeout rights on a sale of control and freezeout rights at prices exceeding the legal minimum; shareholder rights for election of directors; a procedure for arbitration of disputes with shareholder; preemptive rights; and minimum free float of 25% of outstanding shares. Related Party Transactions (4 elements): Related party transactions are an important governance issue in many emerging markets (e.g., Bae, Kang and Kim, 2002; Atanasov et al., 2010). However, from prior studies, it is unclear whether governance indices can capture the risk that these transactions pose to firm market value (e.g., Balasubramanian, Black and Khanna, 2010). We
Nenova (2005) and Carvalhal-da-Silva and Subramanyam (2007) report conflicting results on how 1997 and 2000 changes in Brazilian takeout rights affected the market value of the shares affected by the changes. Bennedsen, Nielsen and Nielsen (2007), report that some Brazilian firms voluntarily provide additional takeout rights to shareholders in connection with equity offerings.
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extract from the survey 4 elements relating to the existence of related party transactions and approval procedures for these transactions. This is the only index for which the value is not the sum of binary variables. If related party transactions are forbidden in the firm charter than the firm receives 5. If it is not forbidden but firm does not do, then firms receives 4. If firm does them, the value depends on the number of approvals requires (board, non-conflicted directors, or shareholders). Disclosure (11 elements): Prior research finds that disclosure is associated with higher firm market value (e.g., Durnev and Kim, 2005). We extract from the survey 11 elements of disclosure as to which there is reasonable variation across firms. These include, among other things, whether the firm prepares financial statements that comply with a set of international accounting standards; prepares English language financial statements; provides financial disclosures, such as a statement of cash flows, that are common in other countries but were not required in Brazil; posts financial statements on a company web site; and discloses related party transactions. Within each index, we give equal weight to each element. Thus, to compute Disclosure index, we sum all 11 elements, and then divide by 11. If a firm has a missing value for a particular element, we use its average score for the non-missing values to compute each index. To calculate BCGI, we sum the indices and divide by 6 (the number of indices). Table 4 presents basic statistics for each of the indices and years. For each survey year, there is a substantial spread in BCGI and each index. Figure 1 provides a graphical depiction of the changes over time in the mean values of each index and BCGI as a whole. Table 5 provides Pearson correlation coefficients between BCGI and its component indices. In all sample years, BCGI correlates positively with each index; with coefficients from 0.47 to 0.81. Part of this correlation is by construction, because each index forms part of BCGI. We therefore also show the correlation of each index with its index complement (BCGI minus that index). The correlations between most indices are generally positive and statistically significant but moderate. The exceptions are Ownership Structure and Related Party Transactions indices, which correlate weakly with the other indices.

Table 3. Description of Indices and Elements

Description of indices and their elements, and average for each element in 2004, 2006 and 2009. Each component assumes either value one if criterion is satisfied or zero, otherwise. Indices are computed as average of elements of that index, except for Related Party Transaction (RPT) index. RPT index has five elements, and is defined to equal 1 if RPTs are forbidden in the bylaws, and 0.8 if RPTs are not forbidden but do not exist. If RPTs exist, RPT index = (sum of remaining three elements)/5. * indicates element that is required for listing on Novo Mercado or Level 2. Board Independence Subindex
*BdIn.1 BdIn.2 BdIn.3 BdIn.4 BdCm.1 BdCm.2 BdCm3 Ow.1 Ow.2 Ow.3 Board includes one or more independent directors Board has at least 30% independent directors Board has at least 50% independent directors CEO is NOT chairman of the board

2004
0.66 0.41 0.16 0.70 0.16 0.66 0.41 0.60 0.40 0.81

Mean 2006 2009

0.87 0.52 0.19 0.70 0.28 0.44 0.50 0.50 0.62 0.88 0.85 0.46 0.20 0.75 0.33 0.49 0.51 0.51 0.63 0.89

Audit Committee and Fiscal Board Subindex

Audit committee exists Permanent or near-permanent fiscal board exists Company has either permanent fiscal board or audit committee which includes minority shareholder representative

Ownership Index
Fraction of common shares owned by largest shareholder 1.5*{[( common shares)/( common shares + preferred shares)] 1/3} Ownership parity = (1 wedge). Wedge = (fraction of voting shares owned by largest owner) - (fraction of econ. ownership by largest owner). Econ. ownership by largest shareholder = (common + preferred shares owned)/(total common + preferred shares) ln (no. of shareholders in control group). If firm has shareholder agreement, number of members of the agreement. If not, no. of 5% shareholders who together hold 50% of common shares. If no control group, or no agreement and all 5% shareholders hold < 50% of common shares, assume = 10 Firm has one or more outside 5% shareholders (the disclosure threshold)

Ow.4 Ow.5 Pr.1 Pr.2 Pr.3 Pr.4 Pr.5 Pr.6 Sh.1 Sh.2 *Sh.3 *Sh.4 *Sh.5 Sh.6 *Sh.7 Rt.1 Rt.2 Rt.3 Rt.4 Rt.5 Di.1 Di.2 *Di.3 *Di.4 *Di.5 *Di.6 *Di.7 Di.8 Di.9 Di.10 Di.11

0.26 0.60 0.81 0.33 0.40 0.92 0.52 0.55 0.37 0.40 0.16 0.34 0.08 0.06 0.84 0.00 0.69 0.87 0.64 0.12 0.71 0.63 0.45 0.51 0.59 0.83 0.33 0.83 0.69 0.60 0.82

0.35 0.50 0.76 0.37 0.52 0.94 0.69 0.55 0.43 0.42 0.57 0.65 0.51 0.09 0.84 0.05 0.72 0.26 0.09 0.00 0.97 0.85 0.74 0.74 0.77 0.95 0.65 0.83 0.88 0.85 0.79

0.39 0.59 0.74 0.53 0.66 0.97 0.78 0.60 0.31 0.40 0.62 0.65 0.56 0.04 0.82 0.18 0.51 0.28 0.14 0.04 0.90 0.84 0.76 0.74 0.96 0.96 0.66 0.82 0.96 0.92 0.72

Board Procedure Index

Firm had > 4 physical board meetings in last year Firm has system to evaluate CEO performance Firm has system to evaluate other executives Board receives materials in advance of meeting Firm has code of ethics Specific bylaw to govern board

Minority Shareholder Rights Index

Annual election of all directors Minority shareholders elect a director Freezeout offer to minority shareholders based on shares' economic value Takeout rights on sale of control exceed legal minimum Arbitration of disputes with shareholders Firm has no authorized capital or provides preemptive rights Free float 25 % of total shares

Related Party Transaction Index

Related party transaction are forbidden in the bylaws Firm does not have loans to insiders, significant sales to or purchases from insiders, or rent real property to or from insiders Board must approve conflict of interest transaction with controller Non-interested directors must approve conflict of interest transaction with controller Shareholders must approve conflict of interest transaction with controller

Disclosure Index
Related party transactions disclosed to shareholders Management has regular meetings with analysts Firm discloses annual agenda of corporate events English language financial statements Financial statements include statement of cash flows Quarterly financial statements are consolidated Financial statements in IAS or US GAAP MD&A discussion in financial statements Annual financial statements on firm website Quarterly financial statements on firm website Auditor does not provide non-audit services

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Table 4. Descriptive statistics for BCGI and indices

Descriptive statistics for Brazilian Corporate Governance Index (BCGI) and its component indices for Brazilian private firms which responded to the 2004, 2006 and 2009 surveys. 2004 2006 2009
Mean Std. Dev. Min. Max. Mean Std. Dev. Min. Max. Mean Std. Dev. Min. Max.

BCGI Board Structure Board Independence Audit Committee and Fiscal Board Ownership Structure Board Procedure Minority Shareholder Rights Related Party Disclosure

0.53 0.45 0.48 0.41 0.53 0.59 0.32 0.65 0.62

0.13 0.23 0.30 0.32 0.14 0.26 0.22 0.24 0.26

0.30 0.00 0.00 0.00 0.26 0.00 0.00 0.00 0.17

0.79 1.00 1.00 1.00 0.90 1.00 1.00 0.80 1.00

0.62 0.50 0.57 0.41 0.59 0.64 0.50 0.65 0.82

0.13 0.22 0.24 0.38 0.16 0.23 0.26 0.31 0.24

0.28 0.00 0.00 0.00 0.30 0.00 0.00 0.00 0.18

0.89 1.00 1.00 1.00 0.86 1.00 1.00 1.00 1.00

0.63 0.51 0.56 0.44 0.60 0.72 0.49 0.64 0.84

0.13 0.23 0.25 0.36 0.16 0.26 0.26 0.35 0.16

0.20 0.00 0.00 0.00 0.27 0.00 0.00 0.00 0.18

0.90 1.00 1.00 1.00 0.91 1.00 0.86 1.00 1.00

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Figure 1. Changes Over Time in BCGI and component indices

Figure shows mean values of each index in 2004, 2006, and 2009

0.62 0.52 0,08 0,09 0,10 0,05 0,11 0,10 2004 0,08 0,10 0,11 0,08 0,11 0,14 2006

0.63 IBGC 0,09 0,10 0,12 0,08 0,11 0,14 Di 2009 BdSt Ow Pr Sh Rt

Table 5. Correlations Correlations between Brazilian Corporate Governance Index (BCGI) and its components for all three years. Index complement is BCGI (relevant indices). Significant coefficients, at 5% or less, are in boldface. s Board Ownership Board Shareholder Related Party Disclosure Structure Structure Procedure Rights Transactions 0.14 BCGI 0.59 0.64 0.60 0.45 0.79 -0.05 0.15 Index complement 0.33 0.36 0.36 0.60 -0.09 0.02 Board Structure 0.29 0.33 0.32 0.06 0.02 -0.08 -0.06 Ownership Structure 0.16 0.04 Board Procedure 0.44 0.08 Shareholders Rights 0.40 Related Party BCGI Index complement Board Structure 0.52 0.28 0.31 0.12 -0.10 0.46 0.21 0.37 -0.02 0.75 0.52 0.11 0.29 0.18 0.44 0.05 0.03 0.00 -0.13 0.23 0.45 0.30 0.43 0.24 -0.10 0.53 0.24 0.27 0.00 0.63 0.30 0.23 0.37 0.06 0.50 0.03 0.03 0.13 0.05 -0.04 0.34 0.67 0.47 0.17 0.14 0.41 0.60 0.02 0.68 0.39 0.19 0.29 0.32 0.63 0.05

2006 2009

2004

Ownership Structure Board Procedure Shareholders Rights Related Party BCGI Index complement Board Structure Ownership Board Procedure Shareholders Rights Related Party

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4 Empirical Results 4.1 Evolution of Brazil Corporate Governance Index

Panel A of Table 6 shows the evolution of BCGI over the period 2004-2009. Corporate governance practices in Brazil, as measured by BCGI, have been improving over time. The average of BCGI in 2004 was 0.53. It jumped to 0.62 in 2006 and 0.63 in 2009. This increase is statistically significant at the 1% level. The improvement in governance was more pronounced for the Regular Market/Level I firms, for whom BCGI went from 0.51 in 2004 to 0.54 in 2006 and 0.56 in 2009. In contrast, for Novo Mercado/Level II firms, the average BCGI score was higher, but there was no significant change between 2004 and 2009. Thus, the gap between the two groups shrank. These changes reflect both changes in the sample, principally new listings (IPOs) in Novo Mercado/Level II, and changes in governance practices at individual firms over time. We can disentangle these two effects, at the cost of reduced sample size, by focusing on overlap firms that responded more than one survey. We do so in Panel B of Table 6. For all overlap firms, one sees improvement in governance between 2004 and 2006 (0.54 to 0.60) and over the whole period from 2004 to 2009 (0.55 to 0.63), but little change between 2006 and 2009 (0.63 to 0.64). This improvement is driven by Regular market/Level I firms. The mean BCGI for these firms went

from 0.50 in 2004 to 0.54 in 2006 and from 0.51 in 2004 to 0.57 in 2009. For firms at Novo Mercado and Level II, BCGI does not change significantly in any of the overlap groups, and indeed drops slightly from 2006 to 2009. The sample of firms that migrate from Regular/Level 1 to Level2/Novo Mercado is too small to allow much analysis. However, it appears that the 7 overlap firms which later migrate were well above the Regular/Level 1 mean before changing levels, and do not greatly change their governance when they migrate.

Table 6. Evolution of BCGI Panel A: All Firms

Average value for the Brazilian Corporate Governance Index (BCGI) by year, its difference across years and markets in which firms are listed. Number of firms in the sample in parentheses.
2004 All Firms in sample Novo Mercado (NM) & Level 2 (L2) Level 1 (L1) & Regular (Reg) Difference in means (NM/L2 vs. L1/Reg) 0.53 (83) 0.71 (7) 0.51 (76) 0.20*** Difference 2004-2006 0.09*** -0.01 0.03* 2006 0.62 (141) 0.70 (68) 0.54 (73) 0.17*** Difference 2006-2009 0.01 0.01 0.02 2009 0.63 (136) 0.71 (70) 0.55 (66) 0.15*** Difference 2004-2009 0.10*** 0.00 0.04**

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Panel B: Only Overlapping Firms

Average value BCGI by year for firms that responded the survey in more than one year. Number of firms (in parenthesis) corresponds to the number of firms that responded the two surveys and (except for last row) did not migrate from Regular Market (Reg)/Level 1(L1) to Novo Mercado (NM)/Level 2 (L2). Last row includes firms which did migrate from Reg/L1 to NM/L2
____2004 & 2006 overlap____ 2004 2006 Difference All Firms NM & L2 in both years L1 & Reg in both years Migrating firms 0.54 (36) 0.71 (5) 0.50 (27) 0.61 (4) 0.62 0.01 0.69 (1) 0.54 0.04 0.54 (35) 0.71 0.02 0.72 (2) 0.75 0.04 0.70 (45) 0.57 0.03 0.51 (21) 0.73 0.01 0.60 0.06* ____2006 & 2009 overlap____ 2006 2009 difference 0.63 (81) 0.69 -0.01 0.72 (6) 0.57 0.06* 0.64 0.01 ____2004 & 2009 overlap____ 2004 2009 difference 0.55 (29) 0.77 0.05 0.63 0.08**

*, **, and *** indicate significance levels at 10%, 5%, and 1% levels (in boldface).

4.2 Where did the improvement come from To understand what aspects of governance are changing, and driving the improvement in BCGI, we analyze the evolution of each index (Panel A of Table 7). There is improvement in the indices for Board Structure (from 0.45 in 2004 to 0.51 in 2009); Board Procedure (from 0.59 in 2004 to 0.71 in 2009); Ownership Structure (from 0.53 in 2004 to 0.60 in 2009); Minority Shareholder Rights (from 0.32 in 2004 to 0.49 in 2009); and Disclosure (from 0.63 in 2004 to 0.84 in 2009). The change in Board Structure index is driven by an increase in Board independence index (from 0.48 in 2004 to 0.56 in 2009). All of these changes are statistically significant (see Table 7). In contrast, the changes in Audit Committee & Fiscal Board subindex and in Related Party Transactions index are small and not statistically significant. If we return to the details on each element provided in Table 3, the improvement in Board Structure comes principally from greater board independence. For example, the number of firms with at least one independent director went from 66% (55/83) in 2004 to 85% (116/136) in 2009. With regard to Audit Committee and Fiscal Board, there was growing use of audit committees: the proportion of firms with audit committee went from 16% (13/83) in 2004 to 33% (45/136) in 2009. But this was offset by declining use of a permanent or near-permanent fiscal board, from 66% in 2004 to 49% in 2009, leading to only limited change in the higher overall average for Audit committee & fiscal board subindex. The offsetting changes in use of audit committees and use of fiscal board are consistent with these institutions playing similar roles and acting as substitutes. Many firms use one or the other: by 2009, 67/% (92/136) have at least one of these institutions;. In contrast, only a few use both: this percentage is 15% (20/136) in 2009.

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The improvement in Board Procedure reflects principally more firms adopting a system to evaluate CEO performance: from 33% (27/83) in 2004 to 53% (72/136) in 2009; adopting a system to evaluate other directors: from 40% (33/83) in 2004 to 66% (90/136) in 2009; and adopting a code of ethics: from 52% (72/136) in 2004 to 78% (106/136) in 2009. These changes occur gradually over our time period, with increases both from 2004 to 2006, and again from 2006 to 2009. Ownership Structure scores rose for Ow.2, which captures the fraction of voting shares in overall capital structure: from 0.40 in 2004 to 0.64 in 2009 (offset by a related drop in fraction of common shares held by largest shareholder from 0.60 in 2004 to 0.50 in 2009); for ownership parity: from 0.81 in 2004 to 0.89 in 2009; and for Ow.4, which captures the size of the control group, from 0.26 in 2004 to 0.39 in 2009 For Minority Shareholder Rights, there is a large improvement from 2004 to 2006, but little change from 2006 to 2009. The main improvements come from a much higher proportion of firms ensuring that minority common shareholders will receive the economic value of their shares in a future freezeout offer: from 16% (13/83) of the firms in 2004 to 62% (84/136) in 2009; more firms providing greater takeout rights to minority shareholders than the legal minimum (80% of economic value for common shareholders; no requirement for preferred shareholders): from 34% (28/83) of the firms in 2004 to 65% (88/136) in 2009; and arbitration of disputes with shareholders: 8% (7/83) of the firms in 2004 to 62% (84/136) in 2009. These changes largely reflect the higher number of Novo Mercado/Level 2 firms in the sample, for which all three elements are required. Disclosure index also increased sharply from 2004 to 2006, with little change from 2006 to 2009. The changes were mainly due to an increase in the number of firms with English language financial statements: from 51% (42/83) in 2004 to 74% (101/136) in 2009; with financial statements in IAS or US GAAP: 32% (27/83) in 2004 to 66% (90/136) in 2009; and which disclosed an annual agenda of corporate events: 44% (37/83) in 2004 to 76% (104/136) in 2009. These changes reflect the higher number of Novo Mercado/Level 2 firms in the sample, for which all three elements are required. There was little change over time in the proportion of Reguar/Level 1 firms which satisfied these elements.8 Panel B divides the sample by listing levels. Once again, one can see that the changes in overall averages reflect a combination of (i) changes in the sample, especially a higher proportion of Novo Mercado/Level 2 firms; and (ii) changes in governance practices at individual firms over

In 2004, 26% of Regular/Level 1 provided IAS or US GAAP financials; this increased modestly to 30% in 2009. In 2004, 46% of Regular/Level 1 provided IAS or US GAAP financials; this was almost the same, at 47%, in 2009.

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time, with within-firm changes occurring primary at Regular/Level 1 firms.

For Novo

Mercado/Level 2 firms, none of the within-group changes in indices means are significant, and the changes from 2004-2009 are negative for three of the six indices. For Level I/Regular Market firms, there is a statistically significant rise in mean values for Board Structure, Board Procedure and Disclosure indices. If we look separately at the overlap firms within each subgroup (results not reported), the picture is similar to Table 7, Panel B: Regular/Level 1 firms improve their governance over our sample period, especially for Board Structure index and Board Procedure index. In contrast, Novo Mercado/Level 2 firms show no consistent pattern of governance changes over time. The overall rise in scores for Minority Shareholder Rights and Ownership Structure indices is driven by changes in the sample, rather than within-firm changes over time.

Table 7. Evolution of corporate governance Index Panel A: All Firms

The sample consists of 83 Brazilian private firms in 2004, 141 in 2006 and 136 in 2009.
2004 Board Structure Board independence Audit committee and fiscal board Ownership Structure Board Procedure Minority Shareholder Rights Related Party Transactions Disclosure 0.45 0.48 0.41 0.53 0.59 0.32 0.65 0.63 Difference 2004-2006 0.05 0.09** 0.00 0.06*** 0.05* 0.18*** 0.00 0.19*** 2006 0.50 0.57 0.41 0.59 0.64 0.50 0.65 0.82 Difference 2006-09 -0.01 -0.01 0.04 0.01 0.07** -0.02 -0.01 0.02 2009 0.51 0.56 0.44 0.60 0.71 0.49 0.64 0.84 Difference 2004-2009 0.06** 0.08** 0.03 0.07*** 0.12*** 0.17*** -0.01 0.21***

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Panel B: By Listing Levels

Sample is same as panel A. Evolution of corporate governance index by listing levels.
Regular Market and Level I Difference 2004 2006 2004-2006 0.44 0.05 0.49 0.47 0.40 0.53 0.58 0.28 0.65 0.61 0.04 0.05 -0.01 0.03 0.03 -0.03 0.07** 0.51 0.45 0.52 0.61 0.31 0.62 0.68 Difference 2006-09 0.01 0.01 0.02 -0.02 0.09** -0.03 0.01 0.03 Difference 2004-2009 0.06* 0.05 0.07 -0.03 0.12*** 0.00 -0.02 0.10***

2009 0.50 0.52 0.47 0.50 0.70 0.28 0.63 0.71

Board Structure Board independence Audit committee and fiscal board Ownership Structure Board Procedure Minority Shareholder Rights Related Party Transactions Disclosure

Novo Mercado and Level II Board Structure Board independence Audit committee and fiscal board Ownership Structure Board procedure Shareholder rights Related party transactions Disclosure 0.59 0.64 0.52 0.60 0.69 0.82 0.66 0.92 (-0.08 -0.01 -0.16 0.06 -0.02 -0.11 0.03 0.05 0.51 0.63 0.36 0.66 0.67 0.71 0.69 0.97 0.01 -0.03 0.06 0.03 0.06 -0.03 -0.04 -0.01 0.52 0.60 0.42 0.69 0.73 0.68 0.65 0.97 -0.07 -0.04 -0.10 0.09 0.04 -0.14 -0.01 0.05

*, **, and *** indicate significance levels at 10%, 5%, and 1% levels (in boldface).

4.3 Why Do Novo Mercado firms have higher governance scores? We saw above that firms listed in Novo Mercado/Level 2 (NM&L2) have higher governance scores, on average, than firms with a regular or Level 1 listing (Reg&L1). We explore here the sources of the differences. One natural question is whether NM&L2 firms score better only for aspects that are mandatory for Novo Mercado/Level 2, or whether they go beyond the minimum needed to qualify for these higher listing levels. To answer this question, we calculated a narrow BCGI index, based on only the elements that are not required for a Novo Mercado listing.9 We call this index Narrow BCGI. Table 8, Panel A replicates Table 6 for Narrow BCGI. Firms listed on NM&L2 score reasonably well on Narrow BCGI. So do Reg&L1 firms. There are three main takeaway points from Panel A. First, NM&L2 firms often go beyond the minimum needed to qualify for a higher listing. Second, firms which decide not to seek a higher listing still go well beyond the minimum governance required by law. For the non-mandatory governance elements, they look rather similar to the NM&L2 firms. The NM&L2 firms score moderately better on the

The governance elements that are mandatory for Novo Mercado are indicated with an * in Table 3.

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narrow index than the Reg&L1 firms, but the gap shrinks over our sample period. Third, there are only modest changes over time in the scores of each group. Still, these changes produce substantial convergence by 2009: the NM&L2 mean is 0.61, versus 0.54 for Reg&L1 firms. In Panel B, we limit BCGI to the elements of BCGI that are required for an NM&L2 listing; we call this index BCGI-NM. The Reg&L1 firms improve substantially on these These changes, combined with the growing

measures, from 0.43 in 2004 to 0.55 in 2009.

proportion of NM&L2 firms in our sample, drive an overall increase in this index from 0.48 in 2004 to 0.78 in 2009. In big picture, the Reg&L1 firms are increasingly adopting voluntarily many of the measures which are mandatory for NM&L2 firms. In contrast, as we saw above, Reg&L1 firms are making only modest changes to the governance elements which are not required for NM&L2 firms.

Table 8. Narrow BCGI and BCGI-NM across years and markets Panel A. Narrow BCGI (26 elements not required for Novo Mercado)
Evolution of Narrow BCGI (index calculated by removing from BCGI the elements that are required or Novo Mercado listing). Required elements are shown in Table 3. Difference Difference Difference 2004 2006 2009 2004-06 2006-09 2004-09 All Firms NM & L2 L1 & Reg Difference NM&L2 vs N1&R 0.52 (83) 0.62 (7) 0.51 (76) 0.11*** 0.04** -0.03 0.03 0.56 (141) 0.59 (68) 0.54 (73) 0.05*** 0.00 -0.01 0.01 0.57 (136) 0.61 (70) 0.54 (66) 0.07** 0.05** -0.01 0.03

Panel B. BCGI-NM (10 elements required for Novo Mercado)

2004 All Firms NM & L2 L1 & Reg Difference NM&L2 vs N1&R 0.48 (83) 1.00 (7) 0.43 (76) 0.57*** Difference 2004-06 0.27*** 0.00 0.09** 2006 0.75 (141) 1.00 (68) 0.52 (73) 0.48*** Difference 2006-09 0.03 0.00 0.03 2009 0.78 (136) 1.00 (70) 0.55 (66) 0.45*** Difference 2004-09 0.30*** 0.00 0.12***

*, **, and *** indicate significance levels at 10%, 5%, and 1% levels (in boldface).

4.4 What are the Principal Differences Between NM&L2 and Reg&L1 Firms? We next take a closer look at the individual elements that drive the differences between NM&L2 and Reg&L1 firms. Table 9, Panel A reports the mean scores over time of Reg&L1 firms on the elements of the BCGI-NM index. It has become common for Reg&L1 firms to include at

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least one independent director on their board.

It thus indicates which are often adopted by

Regular/Level1 firms, and which are rarely adopted. For some elements, we have data on all firms from Bovespa, not just the firms in our sample. In Dec. 2008, of 426 listed firms, a total of 157 firms offered takeout rights above the legal minimum, of which 41 were in Reg&L1. Reg&L1firms also rarely elect arbitration of disputes with shareholders; only 8 of the 124 firms that have adopted arbitration were in Reg&L1. Table 9 Elements within BCGI-NM: adoption by Reg&L1 firms
2004 BdIn1 Sh3 Sh4 Sh5 Sh7 Di1 Di4 Di5 Di6 Di7 Board includes one or more independent directors Freezeout offer to minority shareholders based on shares' economic value Takeout rights on sale of control exceed legal minimum Arbitration of disputes with shareholders Free float 25 % of total shares Related party transactions disclosed to shareholders English language financial statements Financial statements include statement of cash flows
Quarterly financial statements are consolidated Financial statements in IAS or US GAAP

2006 0.74 0.18 0.33 0.05 0.70 0.95 0.49 0.49 0.55 0.90

2009 0.70 0.21 0.27 0.09 0.64 0.80 0.52 0.47 0.92 0.92

0.63 0.08 0.28 0.00 0.83 0.68 0.39 0.46 0.55 0.82

In Table 10, we assess, for the indices of BCGI, where there are important differences between NM&L2 firms and Reg&L1 firms, and how those differences changed over our sample period. The NM&L2 firms have higher scores for board independence in all three survey years. However, they have higher overall Board Structure scores only in 2004 (when our sample includes only 7 NM&L2 firms). In 2006 and 2009, NM&L2 firms show lower scores for Audit Committee and Fiscal Board subindex, and similar scores on Board Structure index as a whole. Firms listed on NM&L2 show consistently higher scores on Ownership Structure, Minority Shareholder Rights, and Disclosure indices. These differences are driven, in large measure, by the inclusion in these indices of elements that are required for NM&L2. Four of the 7 elements of Minority Shareholder Rights index and 6 of the 11 elements of Disclosure index are required for NM&L2. A listing on Novo Mercado (but not Level 2) also requires that firms issue only common shares, not preferred shares; these firms will score higher on Ownership Structure index. In contrast, the difference between the two groups is never significant for Related Party Transactions index. The difference for Board Procedure index shrinks to insignificance over our sample period.

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Table 10. Comparison of NM&L2 and L1&RM across indices and years
Evolution of sub-indices and the difference between Novo Mercado/ Level II and Level I/ Regular Markets. Novo Mercado and Level II 2004 Board Structure 2006 2009 2004 Board independence 2006 2009 Audit committee and fiscal board 2004 2006 2009 2004 Ownership 2006 2009 2004 Board procedure 2006 2009 2004 Shareholder rights 2006 2009 2004 Related party transactions 2006 2009 2004 Disclosure 2006 2009 0.59 0.51 0.52 0.64 0.63 0.60 0.52 0.36 0.42 0.60 0.66 0.69 0.69 0.67 0.73 0.82 0.71 0.68 0.66 0.69 0.65 0.92 0.97 0.97 Level I and Regular 0.44 0.49 0.50 0.47 0.51 0.52 0.40 0.45 0.47 0.53 0.52 0.50 0.58 0.61 0.70 0.28 0.31 0.28 0.65 0.62 0.63 0.61 0.68 0.71 Difference 0.15*** 0.02 0.02 0.17*** 0.08*** 0.08* 0.12 -0.09 -0.05 0.07* 0.14*** 0.19*** 0.11 0.06* 0.03 0.54*** 0.40*** 0.40*** 0.01 0.07 0.02 0.31*** 0.29*** 0.26***

*, **, and *** indicate significance levels at 10%, 5%, and 1% levels (in boldface).

4.4 - Private Equity and Venture Capital The Brazilian Private Equity and Venture Capital (PEVC) industry has grown significantly since the early 2000s.10 Table 11 shows that committed capital in PEVC rose from US$ 6 billion in 2004 to US$ 36 billion in 2009. In the same period 36% (42/115) of the IPOs were by companies with PEVC sponsors. One role that venture capital sponsors can play is to certify the quality of sponsored companies, which can facilitate IPOs (Megginson and Weiss, 1991; Barry et al., 1990); Gompers and Lerner, 1997). PEVC sponsors can also cause firms to adopt practices that mitigate agency conflicts between management/control and investors. Some of these practices may last after PEVC sponsors exit from their investments. We therefore compare governance practices between PEVC sponsored and non-sponsored IPO firms. This comparison is possible only for

10

De Carvalho, Gallucci-Netto and Sampaio (2012) review the evolution of the PEVC industry in Brazil.

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2009 due to the small number of IPO firms, and even smaller number of PEVC sponsored IPOs, in 2004 and 2006. In our 2009 sample, 46% of the IPO firms (24/52) had PEVC sponsors. Table 10 compares the two groups of firms. The only statistically significant difference is in board procedures, for which PEVC-sponsored firms have higher scores. These higher procedure scores translate into modestly higher, but not statistically significant, overall BCGI scores for these firms. The main differences in procedures are existence of a system to the evaluate CEO performance: 75% (18/24) of the PEVC sponsored firms versus 21% (6/28) of non-sponsored IPO firms; use of a system to evaluate other directors: 79% (19/24) of the sponsored firms versus 50% (14/28) of other IPO firms; and existence of a specific bylaw to govern the board: 75% (18/24) against 35% (10/28).

Table 11. Private Equity and Venture Capital Effect

Brazilian Corporate Governance Index average scores for IPO firms in the 2009 survey, divided into PEVC sponsored (24 firms) and non-sponsored (28 firms).
BCGI PEVC Non PEVC Difference 0.69 0.66 0.03 Board Structure 0.50 0.47 0.03 Ownership Board Shareholder Structure procedure rights 0.65 0.68 -0.03 0.78 0.57 0.21*** 0.64 0.65 -0.01 Related party Disclosure transactions 0.65 0.65 0.00 0.95 0.96 -0.01

5 - Conclusion This paper provides a picture of the evolution of corporate governance practices in Brazil over 2004-2009, relying on a series of three hand-collected surveys. Our time period is limited, but covers important developments in the Brazilian markets, including the revival of Bovespa, driven by a wave of new public offerings, almost all on the higher, NM&L2 listing levels. We study changes in a broad, overall Brazilian Corporate Governance Index BCGI. BCGI is comprised of six indices covering major aspects of corporate governance (board structure, board procedure, related party transactions, ownership structure, shareholder rights and disclosure). We exclude government-controlled and foreign-controlled firms from our sample and examine firms controlled by Brazilian private sector groups or individuals (Brazilian private firms). We show that corporate governance practices improved significantly in the 2004-2009 period. These changes reflect both changes in the sample and changes in governance practices at individual firms over time. The sample changes reflect the rise in NM&L2 listings. Changes at the firm level occurred mostly in firms listed on the Reg&L1 levels. Governance practices for firms already listed on NM&L2 were fairly stable during our sample period. On the whole, firms in both groups go well above the minimum listing requirements for their level. Finally, IPO firms with PEVC sponsors look broadly similar to IPO firms without these sponsors; they score better on several board procedures, but not on the substantive aspects of governance.

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